Phil Taylor: Untax the poor

Phil Taylor (blog) runs a small business in Hammersmith and is a councillor for the Northfield ward.

> Policy summary 

Untax the poor - pay no tax or NI until you earn £10K.

> Policy explanation

Right now the worst paid in our country, and typically the worst able or inclined to deal with the "system", have to deal with it twice.   They have to pay income tax and National Insurance at a stupidly low threshold of only £5,035 per annum, or barely £100 per week.  They then have to get snared in Gordon Brown's evil tax credit system to get some of their money back.  Not only does this waste the time and lower the quality of life of the low paid but thousands of bureaucrats have rubbish jobs in battery offices taking money off people and giving it back to them and dealing with all their problems.  The whole edifice is a waste of life.

The new adult rate for the minimum wage came into force last October.  £5.35 per hour.  Anyone working a 37.5 hour week on the minimum wage is earning £10,432.50 and paying £931.79 in income tax.  Our munificent chancellor will gives a single person over 25 years old £421.31 in Working Tax Credit, meaning they make a net payment of £510.48.  This represents a net rate of tax of 4.89%, a rate that is increasing steeply with fiscal drag (see table attached).

The Office of National Statistics' Annual Survey of Hours and Earnings (ASHE) for 2005 shows that average (mean) annual income for all workers in the UK are £23,400.  What they call the 25 percentile is £11,513. In other words 25% of their sample earned £11,513 or less.  This is the minimum wage territory.

By setting the tax and NI thresholds at around £10K we would take almost 25% of workers out of the tax system.  As a side effect we would increase incentives to get into work as the attraction of keeping your own money is great compared to getting benefits or taking on low paid work and having to claim means-tested benefits to make ends meet.

Lost revenue would be replaced by reducing or even eliminating GB's system of tax credits.  Savings in terms of cost of collecting tax and NI from itinerant, low paid workers would be significant both for the state but also employers.  If there were still a shortfall we should look at indirect taxes and new environmental taxes but untaxing the poor should be our priority.

> Political risks and opportunities  

Risks: Would be expensive in terms of short term lost revenue that would need to be replaced. Might look like LibDem policy but they only propose to remove lower rate of tax.

Opportunities: Strong message to the disenfranchised and the underclass that the ladder is being lowered down. Reinforces change message because it prioritises the lowest paid

> Questions for ConservativeHome readers

• Do you feel that it is right to exclude the poor from paying tax? 
• When should people start to make a contribution?
• Should we keep tax credits for children? 
• Should family life be recognised through allowances (for all) rather than tax credits (for the poor only)? 

> Costs

Working out the cost of this would be a job for the IFS rather than me! Clearly it would be costly but it could be argued, Laffer style, that additional incentives to work, increases in indirect taxes, corporation tax, etc would, over time give rise to a net increase in government revenues. Much of the cost, as I have said already, could be recovered by dismantling the tax credit system and not having to deal with the least capable in society.

Comments

[Peter Hatchet]

Totally agree Phil - maybe in a 2nd term of a new Conservative government, Cameron might adopt this!

On your other questions:

(1) Do you feel that it is right to exclude the poor from paying tax? Yes - no question

(2) When should people start to make a contribution? Why not index link it to average income, as you suggest? Lowest quartile pay nothing?

(3) Should we keep tax credits for children? *All* tax credits are an expensive waste of time, collect money, rinse it a bit, give it out again - Why not just eliminate the tax? Child benefit is ok, if not means tested.

(4) Should family life be recognised through allowances (for all) rather than tax credits (for the poor only)? Probably. I believe transferable tax allowances between couples will address this somewhat and education/nursery vouchers and strengthening parental choice would help. I also think "a" parent should be encouraged to stay at home to raise their child for the 1st (say) 5 years of their life. I don't believe both parents should work full-time throughout their childs upbringing.

[Richard]

How about getting rid of income tax and NI for the rest of us too? Seeing as I am forced to fund services I don't use it would be nice if those who actually used them made a contribution.

[Neil Reddin]

You won't find me arguing against cutting taxes.

Another downside of the tax credit system is that with the 37p in the £ clawback, those on low incomes face an effective 70% marginal tax rate (22% IT, 11% NI and 37% TC clawback)

[Edward]

Definitely worth looking at. Great idea in principle - it also increases the incentive to get out to work rather than remain on benefits for those who are unemployed.

[David Cooper]

Agree entirely and I'm sure James Bartholomew (The Welfare State We're In) would too.

[anon]

Agree. Would suggest raising the limit to £15k (providing a monthly tax free income of up to £1,250). I never understood why we tax people who earn below this threshold, only to have to return it to the very individuals we have taken it off in the first place through the benefits system. Not to mention the ancillary overheads in funding the processing and payment of benefits. The limit could then rise annually in line with inflation

[Paul Oakley]

Couldn't agree more. The government's own view is that anyone earning less than 60% of average earnings is in poverty. On the basis that average earnings are about £24K, the poverty line is at £14,400.

Certainly, tax credits exist to blunt the sting of the "tax debits", but these instil reliance upon, if not gratitude to, the state. An unhealthy position as this is the low earner's own money being handed back to him or her.

The long-term unemployed and those on incapacity benefit are often criticised for a failure to take work, even if low-paid. However, such a decision is a wholly rational one in circumstances where the taxman as pickpocket makes it economically unrealistic to exit the benefit system.

[DavidDPB]

Great idea. The top rate may have to increase to ensure revenue neutrality in the short term to medium term until costs can come down. It's a great way to reward the worse off in society for hard work, and to extract them from welfare dependency.

[Martin Wright]

I entirely support your aspirations. In theory the proposal would have a liberating effect, enabling some at the margin to re-enter the world of work without becoming ensnared in the tax credit system. And some one man businesses might take on their first employee if they didn't have the admin of PAYE and tax credits. The problem will be in whether the savings in TCs and related admin will outweigh the lost tax and NI revenue.

One point,however, that will need examination is the extent to which Tax Credits are a subsidy to small employers and whether these subsidies are right in principle. If no one can live on the minimum wage without the subsidy of tax credits, would society be better off with a higher minimum wage but lower general taxation (through abolition of tax credits)? Put simply: some of our taxes go towards subsidising businesses that cannot or will not pay a decent wage. Is it right that a proportion of labour costs is borne externally rather than internally within the business concerned?

[Opinicus]

I prefer a citizen's wage and no tax allowance to raising the tax allowance as proposed here. It is better that the poor have a stake in Society and pay something towards it so they dont vote for extra benefits at everyone elses expense.

Raising the tax threshold is very expensive and will require extra taxes elsewhere. It doesnt abolish the poverty trap but brings it in at a higher level

A citizens wage gives everyone basic benefits and this encourages everyone to do some work as they get all the money (after income tax) For most it is an in and out transaction on their PAYE form.

Being a universal benefit, a citizens wage requires no means testing and the entire DSS can be closed down as it can be administered through the Revenue. This large administrative saving offsets some of the costs.

[aristeides]

Is the proposal that the threshold at which people start paying tax should be around £10k for all taxpayers, i.e. an effective increase in the personal allowance of £5,000? If so, the cost is quite simple to calculate roughly. There are about twenty million taxpayers in the UK who pay at basic rate or above. If each pays 22% tax and 11% employees’ NICs, then 33% of £5,000 multiplied by 20 million people equals £33 billion. Presumably, employers’ NICs would have to be added to this figure, adding another few billion, from which some billions could be deducted to take account of the “starting rate” of 10% but at the end of the day, this is a very large sum of money which it is currently relatively easy to raise.

Martin Wright says that the effect of tax credits is to subsidise small employers. I think he probably means low-paying employers but unfortunately this proposal will have much the same effect: if you subsidise/tax less a certain band of workers, you must not be surprised if you get more of them.

I think we probably need to go along the lines of a citizen’s/minimum income which is cheaper and less distortive.

[simon]

Agree with the policy but the threshold is too low. I agree with the previous contributor who suggested £15k. After all those people will pay tax on a variety of things like fuel and VAT.

[Prentiz]

I'm not sure I agree with the idea of exempting anyone entirely from taxation. Whilst it certainly should levied fairly, and in proportion to people's real ability to pay, there is a risk in further adding to the taxless classes.

With council tax the problem is already clear, a substantial proportion of voters in some areas who, because they pay no council tax at all due to council tax benefit, have no problem voting for people who will constantly put council tax up - giving an in-built boost to tax raising parties.

By all means lets reduce the unfair tax burden on the poor - but we need to make everyone pay (less) fair taxes. No taxation without representation should cut both ways.

[Martin Wright]

Aristiedes - you are quite right - in my second paragraph I meant to say low-paying employers. This makes things worse, since our taxes are subsidising all employers paying low wages including the Tescos of this world.

It would be interesting to do a thorough study of what would happen if tax credits were abolished, possibly with a return to some simple (but limited)benefits in lieu. The subject is inevitably very complicated with pressures in both directions. Abolition of TCs could have the effect of driving up low wages as employers compete for workers who would otherwise opt for the dole. Against this employers might try to mitigate by bringing in more EU workers. This effect might be reduced by a combination of higher tax allowances as advocated by Phil Taylor and a substantial increase in the minimum wage. Obviously higher wages would mean higher prices as e.g. farmers and retailers pass on higher costs. On the other hand consumers would have far more of their own money in their pockets once the Tax Credit system was abolished and hence would be able to pay the higher shop prices.

The effect on manufacturing would be different as clearly employers have the option of increased offshoring. The extent to which this would happen and indeed would be undesirable would need thorough research. There is at least an argument that UK manufacture ought to be concentrated on high added-value, not £6per hour jobs.

I can't prove anything as I don't have the numbers; it would take a team of economists a year or two to calculate the impact of a proposal. All I would say is that my instinct is that there must be a better way than the current system, which taxes virtually everyone, then pays tax credits millions (including couples with joint incomes as high as £55,000pa!) with all the adminstration entailed and the corrosive effects of a dependency culture.

[Peter Hatchet]

On the taxation/responsibility issue - I'm fairly relaxed.

I don't think that poorer voters would go full steam for higher benefits if we raised the income tax threshold. Much more of them would be in work for starters. It would also make incentives to work much sharper by greatering a bigger gap between benefits income & working income (many supplementary benefits may no longer be necessary anyway) In time, this policy would lead to a reduction in the numbers on benefits and expand the economy too.

In any event, they'd remember it was *us* that eased their financial burden & gave them more choice and freedom. Just as happened with Council House sales - it would increase independence and responsibility.

[Richard]

"I think we probably need to go along the lines of a citizen’s/minimum income which is cheaper and less distortive."

Paid for by who?

[aristeides]

"Paid for by who?"

Who whom? The eternal question...

Same people who pay for dole, income support, tax credits, etc, and all the infrastructure and nonjobs that administrate them at the moment.

But the key is that it incentivises work at the margin, so it ends up paying for itself in part. This policy conversely, as Jonathan rightly says above, doesn't abolish the poverty trap but brings it in at a higher level.

[Richard]

"Same people who pay for dole, income support, tax credits, etc, and all the infrastructure and nonjobs that administrate them at the moment."

I recall that after leaving university some of my friends planned to instantly sign on the dole to take back money that they believed had been stolen from their parents.

While I accept there is a general consensus in favour of taxation to pay for public services I wonder to what extent this support will be undermined if an increasing number of people are perceived as getting something for nothing.

[aristeides]

Richard - rest assured that no one who mentions citizens/basic/minimum incomes here does so for socialistic reasons!

The idea behind it is to get people off handouts and into work without them losing out financially by doing so (the welfare trap). In other words, and put simply, if I get fifty pounds per week dole and I decide to go out to work for sixty pounds, I lose the dole so that a week's work is worth effectively ten pounds to me, i.e. not worth it. If I keep the dole as well, it becomes very worthwhile to work, and - very quickly - I start paying the dole back in taxes. This breaks the welfare cycle.

[Yet Another Anon]

The focus on Income Tax should be to raise it so that no one under average earnings pays it, and to integrate Capital Gains Tax into it - one set of allowances and rates with the percentage of Capital Gains assessable for tax remaining the same.

As for NI - I think that the money raised in NI should be spent only on contributory benefits and that the amounts raised should be cut.

[Yet Another Anon]

Rates of Income Tax need to be cut as well - how about a flat 10% rate with VAT being extended and public spending cut.

[Mark Wadsworth]

Martin "I can't prove anything as I don't have the numbers; it would take a team of economists a year or two to calculate the impact of a proposal"

Martin, I do have the numbers and they pan out very nicely.

Here is my fiscally and politically neutral solution:

Offer people a choice between
a) a higher personal allowance of £9,000 and pay tax at 33% on everything above that, OR
b) claim a "citizen's income" of current income support/Pensions credit levels depending on age (£57 or £114 a week) and pay 33% tax on ALL your income. Double child benefit to £34 a week for all under 18s.

If you earn less than £9,000 you are a net benefit claimant, if you earn more than £9,000 you are a net taxpayer. There is no particular jump in net income at £9,000 and nobody's total marginal withdrawal rate is more than 33% (whether you see this as losing benefits or paying income tax is neither here nor there).

Most taxpayers would be at least £20 or so a week better off, except for people who do not work at all who are no worse off.

This would be perfectly affordable - if you say that £114 guaranteed old age pension is enough, you can scrap tax relief for pensions contributions as well, which means the overall SAVING would be £17bn, enough to get rid of higher rate tax as well. And of course the entire welfare state and tax credits and so on are replaced by the above (except disability related stuff and housing benefit - different topics).

And there would be enormous dynamic effects - as nobody would lose benefits by taking a job, there would be many more people willing to take on low paid jobs.

Right, I'll stop now.

[Yet Another Anon]

Offer people a choice between
a) a higher personal allowance of £9,000 and pay tax at 33% on everything above that, OR
b) claim a "citizen's income" of current income support/Pensions credit levels depending on age (£57 or £114 a week) and pay 33% tax on ALL your income. Double child benefit to £34 a week for all under 18s.
A Universal Payment based on strict residency requirements with rates based on 1948 National Assistance allowing for inflation and with variable rate benefits such as medical care, Edication costs, Housing Benefit, Council Tax Benefit etc.... replaced by Low Interest Means Tested Loans repayable say at 10% of all earnings over £10,000pa, the minimum wage scrapped, the HSE scrapped and Arts spending cut, Sports spending abolished and finding cuts in other areas of public spending except Defence, R&D, Transport, Policing & National Security.

[Yet Another Anon]

This would be perfectly affordable - if you say that £114 guaranteed old age pension is enough, you can scrap tax relief for pensions contributions as well, which means the overall SAVING would be £17bn, enough to get rid of higher rate tax as well. And of course the entire welfare state and tax credits and so on are replaced by the above (except disability related stuff and housing benefit - different topics).
Have an addition to the Residents Payments based on number of years since the person reached 55 up to a maximum of 50 years and the severely disabled could get full rate for a 105 year old whether they were 0 or 105+ - disability allowances for those needing care could be fitted into such a scheme, perhaps with qualificatioon rules tightened - longer waiting periods etc....

[Mike A]

This is an old chestnut.

The poor pay virtually nothing in direct taxes - all in direct taxes. Look at the HMT document on it here:

http://www.statistics.gov.uk/articles/nojournal/taxesbenefits200405/Taxesbenefits200405.pdf

This would be contriving to spend money on a tax cut without (a) actually helping the poorest (who already pay no/little in direct tax) and (b) spending a lot on cuts without actually cutting any marginal rates.

For these reasons, the IFS have assessed it, and decided (in as diplomatic a way as they can) it would be a waste of money:

http://www.jrf.org.uk/bookshop/eBooks/1590-poverty-benefits-taxation.pdf